Nightline: A Matter of Supply and Demand

For Nora Whitcotton, the power crisis in California is a matter of life and death. She suffers from lung disease, and she relies on an electric oxygen machine 24 hours a day.

“This is something I have to have,” says Whitcotton. “This is nothing that I can shop a sale or cut back on.”

For a 63-year-old widow on a fixed income, like Whitcotton, the rules of the free-market economy are harsh ones. She understands that if you have to have it, you have to pay the price. Whitcotton and her 2.5 million neighbors in greater San Diego have been paying radically greater power prices since this summer.

During the dog days of August, the power company called Whitcotton to warn of the possibility of rolling blackouts. The company representative suggested she get bottled oxygen to hold her over. But with the thermometer inching over the 100-degree mark, Whitcotton was worried about not having air conditioning. The representative told her to “just call 911” if there was a problem.

The Energy Crunch

Individuals and businesses alike are feeling the energy crunch, and they hoped to get some relief in the cooler winter months. But it looks as if even higher rates may loom ahead. Many San Diego area residents blame it on deregulation.

Like many states, California has opened its utilities to free-market competition, hoping to provide consumers with more services and lower rates. In San Diego, since this summer, it’s been more or less the same service, but at far higher prices.

Michael Shames, former director of the Utility Consumers’ Action Network, says in the past, regulators set rates based on what it cost to produce electricity, plus a profit margin that was also set by the regulators.

“The big change now is the generators of power can charge whatever they want,” says Shames. “There is no limit.”

Under the old system, San Diego Gas and Electric both generated and delivered its own power. But with deregulation, it has had to sell off its generating plants and buy power on the free market from energy wholesalers.

And customers were now exposed to changing prices on the wholesale market. Stephen Baum, the CEO of Sempra Energy, the parent corporation of SDG&E, says his company had passed the wholesale prices to customers without a markup.

But not everyone had to pay the escalating prices. Some big customers had negotiated future contracts at fixed rates that proved to be a bargain. The University of California at San Diego was one such group, as was Hewlett-Packard, which said it saved $600,000 by cutting an independent deal.

Shames says certain companies, which were fairly sophisticated and understood the system, locked into long-term contracts to protect themselves from market fluctuation. “And that left it to the regular customers, who couldn’t possibly understand the complexity of this market, to essentially eat it.”

Looking for Answers
When the Federal Energy Regulatory Commission came to San Diego in November to hold a hearing on what had gone wrong with its once-lauded pioneering plan in deregulation, it heard from a lot of angry people.

FERC Chairman James Hoecker said the session left him determined to “prevent this from happening again.” But less than a month later, it had happened again.

So was it simply the theory of supply and demand? According to Hoecker, it wasn’t.

“Some people have pointed to potential gaming of the market, market abuses and we are investigating that,” said Hoecker.

While the investigation continues, so does an angry debate between the California political leaders who helped design this de-regulation and some of the folks who profited from it.

California state Sen. Steve Peace, a Democrat who represents the southern and eastern sections of San Diego County, blamed “robber barons” for stealing the wholesale market. “It’s that simple. It’s been illegally manipulated and the only policeman with any authority is apparently at the doughnut shop.”

But Lynne Church, president of the Electric Power Supply Association, argues the businesses were playing by the rules. “They were reacting as rational business people to the market that was handed to them,” said Church. “They are showing through their high prices that there’s a real supply shortage.”

And the business people did their jobs well. When the Dow Jones News Service published its own top 10 list of “Winners in the Summer of Luck,” energy companies like Enron and Reliant made honors. And the grand prize winner, the Williams Cos., saw its second-quarter profits in fiscal year 2000 jump $360 million from the year before.

A federal investigation has concluded this summer’s prices for power in San Diego “were just not reasonable.” But this doesn’t mean they have gone away.

Just recently electricity was going for $1,500 a megawatt in California, and as much as $5,000 in Washington state. That is up from $25 to $35 a megawatt hour just a year ago.

That worries U.S. Rep. Bob Filner, D-Calif. “We San Diegans were like 3 million canaries brought into the mine, and we died,” he says.

The old public power system was based on a judgment that political restraint on power prices was worth some economic inefficiency because it protected people who were in no position to bargain for such essential services. As today’s deregulating economy embraces more and more free market principles, some are nostalgic for that old bargain.

For them San Diego is the electric Boston Massacre, warning consumers of bigger deregulation battles to come.